Centre may opt to control retail fuel prices: S&P

The government is likely to opt to control retail fuel prices to cushion inflationary shocks as petrol and diesel prices scaled new record highs on Monday, said S&P Global Ratings. India imports almost 80 per cent of its crude oil requirements. Rising crude prices and the recent 10 per cent slide in the rupee has translated into higher fuel prices for consumers.

"This puts pressure on consumers and results in higher inflation, a sensitive subject, given the impending federal and state elections over the next 12 months," S&P Global Ratings credit analyst Vishal Kulkarni said. "We don't expect any reversion to the subsidy mechanism similar to before 2014 in India, even though the incumbent government may opt to control retail fuel prices, using other means, to cushion the inflationary shocks," Kulkarni added. The US-based agency said it assumes a Brent crude oil price per barrel of $70 for the rest of 2018, $65 for 2019, and $60 for 2020, against the current spot price of almost $80 per barrel in our financial projections. The government freed petrol price from its control in June 2010 and diesel in October 2014. It now provides a limited subsidy on LPG and kerosene.

S&P said amid rising crude oil prices, tight implementation of retail fuel-pricing policies will influence the leverage of Indian oil companies. "While rising oil prices bolster the cash flows of upstream businesses, cross subsidies from upstream to downstream segments could limit such benefits," Kulkarni said. If downstream companies can't fully pass-through higher crude oil prices to consumers, profitability could weaken.